Enquiry:

Our Company is public unlisted company, registered under Companies Ordinance, 1984, since 1991. We are Economically Significant Company and stakeholders of our financial statements are shareholders, creditors, debtors and commercial Banks.

Our Company has revalued its non-current assets comprise of land, building and plant & machinery. Revaluation was carried out in May, 2014 and incorporated the revaluation surplus amounting to Rs. 1.8M in financial statements of 2014. However, the incremental depreciation on revaluation surplus is so high that it converts Company’s operating profit into operating loss. As incremental depreciation is initially included in cost of sales and added back in other comprehensive income subsequently.

Based on the information provided, the operating loss amounting to Rs. 3M and loss before WWF amounting to Rs. 8M, resulting from the presentation mentioned above is not presenting the true picture of our operating activities. The factual position is that the Company has earned operating profit amounting to Rs. 133M and profit before WWF is amounting to Rs. 128M. Furthermore, this situation is creating a very uncomfortable position for our banks as they mostly use operating profit for assessment of company’s performance.

It is requested to please guide us whether in our opinion; deviation from International Accounting Standards appears to be only solution here. Your response in this regard will help us to ensure the compliances, with all the applicable laws in time.

Opinion:

The Committee would like to refer paragraph No. 19 and 20 of IAS 1 ‘Presentation of Financial Statements’ which permits departure under extremely rare circumstances where management concludes that compliance with a requirement in IFRS is very much misleading.

In the inquired scenario, it is opined that departure will not be applicable because it was an accounting policy choice of the Company to go for the revaluation model.

Further, the Committee is also of the view that depreciation will be charged on revalued amount as per requirements of IAS 16 ‘Property, Plant and Equipment’. Accounting for revalued Property, Plant and Equipment as prescribed under IAS 16 gives a true reflection of use of asset under revaluation model; therefore, the same should be adopted.

Based on the information provided, the presentation of the incremental depreciation as an item of other comprehensive income, is incorrect. The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed of. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost. Transfers from revaluation surplus to retained earnings are not made through profit or loss.

(December 26, 2016)